The IRS’s announcement that it will reopen its nonfiler portal to individuals who were denied supplemental economic impact payments (EIPs) for their dependents won’t stop a lawsuit challenging how the tax agency handled them.
Thousands of federal beneficiaries denied their dependents’ $500 EIPs because the beneficiaries missed a May 5 registration deadline will have until September 30 to register, the agency said in an August 14 statement and FAQ.
Payments should be issued in mid-October, it added.
“I’m really happy to see this announcement,” said Christine Speidel, co-counsel in McGruder v. Mnuchin, No. 2:20-cv-03590 (E.D. Pa. 2020). The case, filed July 22 in federal district court, challenged as arbitrary and capricious the IRS’s use of FAQs and other informal guidance, which the plaintiffs argued was contrary to the language of the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136).
Despite the IRS’s apparent move to address issues raised by the case, Speidel said the McGruder lawsuit will proceed. The plaintiffs’ attorneys plan to meet with the judge for a non-evidentiary hearing on August 17, she said.
IRS Commissioner Charles Rettig said in a statement accompanying the August 14 announcement that “given the extremely high demand for EIP assistance, we have continued to prioritize and increase resource allocations to eligible individuals, including those who may be waiting on some portion of their payment.”
‘Smart Move’
“This is great news for disabled and retired caretakers who were not able to make the nonfiler portal deadlines,” Speidel said. “Kudos to the IRS for taking steps to get badly needed relief to these families.”
Speidel said, “This looks fantastic, compared with the IRS position earlier,” that individuals who missed the May 5 nonfiler registration deadline would have to wait until after filing their tax returns in 2021 to get their dependents’ $500 supplemental EIPs.
Nina Olson, executive director of the Center for Taxpayer Rights, said of the announcement, “It really addresses the issue in the McGruder lawsuit.”
However, Olson said the McGruder plaintiffs could argue that the IRS’s announcement is still discriminatory toward the disadvantaged taxpayers, because other nonfilers have until October 15 to use the portal.
On the other hand, Olson said, “I think it’s very smart that the IRS made this move.” She said IRS executives had a “bipartisan call” with Senate Finance Committee staff during the week of August 10 to discuss nonfiler federal beneficiaries EIP issues, although Tax Notes could not immediately confirm that meeting.
Olson also said the IRS and Treasury’s arguments for sovereign immunity under the Anti-Injunction Act — that plaintiffs must first file tax returns and receive a notice of deficiency before they have standing to challenge the tax agency — are increasingly falling on deaf judicial ears.
“We’re beginning to carve out or narrow the reach of the Anti-Injunction Act,” Olson said. With courts increasingly siding with plaintiffs on the issue of standing against the tax agency, Olson said, “to some extent, even if you lose on the merits, you’ve still got that judgment.”
Progress
The IRS had already moved to address some concerns addressed in the McGruder lawsuit, observers noted.
National Taxpayer Advocate Erin Collins, whose Taxpayer Advocate Service is part of the IRS, announced July 30 in a blog post that the IRS would soon issue $500 supplemental EIPs to individuals who met the original May 5 online registration deadline for their dependents but who were denied the payments because of a software glitch.
McGruder challenged the IRS and Treasury’s use of informal guidance, including FAQs, press releases, and other nonregulatory instructions issued to taxpayers and practitioners concerning the distribution of EIPs under the CARES Act.
The lawsuit noted that FAQs and other nonregulatory guidance — including a press release giving nonfiler federal beneficiaries just 40 hours to register their dependents online, as well as 69 FAQs on the CARES Act alone — can be changed without notice by the IRS.
The McGruder plaintiffs argued that Treasury and the IRS’s informal guidance was arbitrary and capricious under the Administrative Procedure Act and a violation of their constitutional rights to equal protection under the law.
The McGruder attorneys filed a motion for a preliminary injunction to stop the tax agency and Treasury from what they said was continuing discrimination against individuals who couldn’t meet the original May 5 deadline.
‘This Works, Too’
The IRS’s August 14 announcement stated that Social Security, Supplemental Security Income, Department of Veterans Affairs, and Railroad Retirement Board beneficiaries who have already used the nonfiler tool to register their children need take no further action.
Olson said that volunteer income tax assistance sites and tax counseling for the elderly services will need to ramp up to make sure eligible nonfiler beneficiaries without internet skills can access the nonfiler tool in time. Otherwise, those nonfilers will have to wait until after they file their 2020 tax returns in 2021.
Individuals who received EIPs by direct deposit will see their dependents’ payments deposited to the same account. Everyone else will get a check.
Some issues remain unresolved, the IRS acknowledged.
People whose EIP was taken or applied to a spouse’s past-due child support will be issued the portion of their EIP that was used to cover the other spouse’s debt.
In addition, “The IRS is actively working on a systemic solution to reissue payments to surviving spouses of deceased taxpayers who were unable to deposit the initial EIPs paid to the deceased and surviving spouse. For EIPs that have been cancelled or returned, the surviving spouse will automatically receive their share of the EIP,” the IRS said.
Olson said that even with the IRS’s latest announcement, there are still taxpayers being denied their EIPs.
Incarcerated individuals, as well as U.S. citizens filing jointly with spouses who use individual taxpayer identification numbers to complete their returns, are still being denied EIPs, Olson said. Some prison administrations have taken incarcerated persons’ EIPs and returned them to the IRS, she noted.
“I would’ve preferred” a judicial ruling to sort out the IRS’s implementation of EIPs, Olson said of the tax agency announcement, “but this works, too.”